Understanding Double Taxation in Nigeria.

syntaxlp
Photo by Nataliya Vaitkevich

Double taxation happens when the same income is taxed in more than one country i.e where an individual or business is taxed twice on the same income or profits. This usually occurs when two countries impose taxes on the same source of income. For example, a Nigerian company operating in another country might face tax on its income both in Nigeria and the foreign country. This is a situation which often leads to a higher tax burden and discourages international trade and investment due to the burden it creates on taxpayers, especially those engaged in cross-border activities.

How Double Taxation Affects Nigerians

For Nigerian residents and businesses with international operations, double taxation can make cross-border business transactions costly and complicated. It can affect:

  • Individual taxpayers: Nigerians earning income abroad might be taxed both by Nigeria and the foreign country.
  • Businesses: Companies operating in multiple countries could face multiple tax obligations on the same profits.

Double Taxation Treaties (DTTs) in Nigeria

Double Taxation Treaties (DTTs) have been introduced to address this issue by reducing or eliminating the tax burden. To help mitigate the effects of double taxation, Nigeria has signed several Double Taxation Treaties (DTTs) with various countries. These treaties are agreements between countries to avoid taxing the same income twice. Some of the countries Nigeria has signed DTTs with include:

  • Belgium
  • Canada
  • China
  • Czech Republic
  • France
  • Netherlands
  • Pakistan
  • Philippines
  • Romania
  • Singapore
  • Slovakia
  • South Africa
  • Spain
  • Sweden
  • United Kingdom

Additionally, Nigeria signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS MLI) on August 17, 2017. This convention aims to update international tax rules and prevent tax avoidance strategies.

Benefits of Double Taxation Treaties (DTTs)

Double Taxation Treaties provide several benefits for individuals and businesses, including:

  1. Relief from Double Taxation: The main benefit is relief from being taxed twice on the same income.
  2. Reduced Tax Rates: DTTs often reduce tax rates on income like dividends, interest, and royalties.
  3. Exemptions for Certain Income: Some income, like profits from foreign airlines or shipping companies, may be exempt from tax.
  4. Dispute Resolution: Where necessary, DTTs provide a Procedure to resolve tax disputes between countries.
  5. Non-Discrimination: Taxpayers are treated equally, regardless of their nationality or country of residence.

Who is Eligible for Relief from Double Taxation?

Relief from double taxation is available to:

  • Nigerian residents who earn income from abroad.
  • Residents of Nigeria’s treaty partners who earn income in Nigeria.
  • Individuals or entities that are residents in both Nigeria and a treaty country.

Conditions for Entitlement to Relief

To qualify for relief under a DTT, the following conditions must generally be met:

  • The taxpayer must be liable to pay tax in both countries.
  • The income must not be exempt from tax in Nigeria.
  • The relief must be covered by the relevant treaty.
  • The claim for relief must be made within the time limits set by the treaty.

Taxes Subject to Relief

In Nigeria, taxes that can be relieved under a DTT include:

  • Personal Income Tax
  • Companies Income Tax
  • Capital Gains Tax
  • Petroleum Profits Tax

However, it’s important to note that Value Added Tax (VAT) is generally not covered by DTTs. VAT is typically applied at each stage of production and is borne by the final consumer.

Permanent Establishments and Double Taxation

If a company has a Permanent Establishment (PE) in a foreign country, it may be taxed in both Nigeria and the country where the PE is located. However, only the profits directly linked to the PE’s activities are taxed in the foreign country. The tax treatment of such cases is usually outlined in the DTT between the two countries.

Conclusion

Double taxation can be a significant issue, but Double Taxation Treaties offer a way to reduce or eliminate this burden. By understanding how these treaties work and the benefits they provide, individuals and businesses can avoid paying excessive taxes and ensure compliance with international tax rules. Always consult a professional for guidance on claiming relief and ensuring that you meet the requirements under the relevant treaties.

Leave a comment